Microfinance: No Substitute For Good Governance

Image via WikipediaDemocracy is basic. I am a firm believer in democracy. The year a country becomes a modern democracy is year one in that country's life. Lack of democracy, bad governance, massive corruption, and civil war are situations that are not within the domain of the microfinance industry. Basic good governance is critical for the microfinance industry to have a playing field where it can start performing, it can start to lift people out of poverty in large numbers.

There is plenty of diversity within the microfinance industry. There are many right ways. And microfinance is not the only tool with which to cure poverty. China has lifted more people out of poverty the past few decades than any other country, and it does not even allow MFIs to come in.

Good governance, coupled with strong education and health infrastructures that rope in almost everybody, coupled with strong job programs can lift hundreds of millions out of poverty. We have seen it work.

Microfinance is not the only tool with which to cure poverty. It needs optimal conditions to be able to make a difference. And it might or might not be the best tool. But poverty is a big enough and complex enough problem that we have to throw all tools at our disposal. Microfinance is one of those tools. And we just have to go ahead and do the best job we can.

Kiva - About Microfinance Microfinance is also the idea that low-income individuals are capable of lifting themselves out of poverty if given access to financial services. While some studies indicate that microfinance can play a role in the battle against poverty, it is also recognized that is not always the appropriate method, and that it should never be seen as the only tool for ending poverty...... "The poor rarely access services through the formal financial sector. They address their need for financial services through a variety of financial relationships, mostly informal." ....... Credit unions and lending cooperatives have been around hundreds of years. However, the pioneering of modern microfinance is often credited to Dr. Mohammad Yunus ....... he world bank estimates that about 160 million people in developing countries are served by microfinance. ....... Between the 1950s and 1970s, governments and donors focused on providing subsidized agricultural credit to small and marginal farmers, in hopes of raising productivity and incomes. During the 1980s, micro-enterprise credit concentrated on providing loans to poor women to invest in tiny businesses, enabling them to accumulate assets and raise household income and welfare. ....... "Credit is available from informal commercial and non-commerical money-lenders but usually at a very high cost to borrowers. Savings services are available through a variety of informal relationships like savings clubs, rotating savings and credit associations, and mutual insurance societies that have a tendency to be erratic and insecure." ...... microfinance is an expensive enterprise - you can make a lot more money on a large loan than a small loan, and you won't make much money holding savings accounts with very little funds in them. ...... The transaction cost of the $500 loan is not much different from the transaction cost of the $100 loan ........ very poor clients can be reached profitably ..... microfinance helps to empower women, thus promoting gender-equity and improving household well-being ...... the magnitude of impact is positively related to the length of time that clients have been in the program ...... Poor people, with access to savings, credit, insurance, and other financial services, are more resilient and better able to cope with the everyday crises they face. ...... With access to microinsurance, poor people can cope with sudden increased expenses associated with death, serious illness, and loss of assets. ...... reliable sources of credit provide a fundamental basis for planning and expanding business activities ..... over a long period of time many clients do actually graduate out of poverty. ...... make the transformation from "every-day survival" to "planning for the future." ...... The incomes of Grameen members were 43% higher than incomes in non-program villages...... populations that are geographically dispersed or have a high incidence of disease may not be suitable microfinance clients ...... In these cases, grants, infrastructure improvements or education and training programs are more effective. ..... access to financial services has improved the status of women within the family and the community. Women have become more assertive and confident.... reports of declining levels of violence against women ...... Microfinance is but one strategy battling an immense problem. ..... Microfinance may not be appropriate for populations with a high incidence of debilitating illnesses (e.g., HIV/AIDS). Dependence on a single economic activity or single agricultural crop, or reliance on barter rather than cash transactions may pose problems. The presence of hyperinflation, or absence of law and order may stress the ability of microfinance to operate. Microcredit is also much more difficult when laws and regulations create significant barriers to the sustainability of microfinance providers (for example, by mandating interest-rate caps) ...... Investments in infrastructure, such as roads, communications, and education ...... market centers or small-scale irrigation schemes ..... Employment programs .... Food-for-work programs and public works projects ..... literacy classes and community development to market-based business-development services .... improved access to market ..... streamlining micro-enterprise registration, abolishing caps on interest rates, loosening regulations governing non-mortgage collateral, strengthening the judicial system, and reducing the cost and time of property and asset registration can foster a supportive climate for microfinance